Spontaneously productive

Menu

Tag Archives: immigration

One claim about liberalized immigration policy is that it will raise the incomes of immigrants and quite possibly natives, but that average incomes of First World countries will fall.

How is this possible? It’s a matter of averaging two groups together. Suppose you have Country A with 100 people each earning $50,000, and Country B with 100 people each earning $10,000. Then, everyone in Country B moves to Country A and earns $30,000 due to their higher labor productivity in Country A. And in this case, Country B’s labor complements Country A’s labor. So the people of Country A see their incomes rise to $60,000. Both groups benefit. But now the average income of Country A has fallen from $50,000 to $45,000, even though every single person is better off. This is an example of Simpson’s paradox.

So there is a political concern that, even if immigration doesn’t harm natives, it could look like it’s harming natives. What’s the solution? One possibility is publishing another set of income figures: not income per person in America, but average income of native-born Americans. (And average household income for households whose heads are natives, and average hourly compensation for native workers; a variety of measures would exist.) This is the “income per natural” idea developed by Michael Clemens and Lant Pritchett of the Center for Global Development.

Is this dishonest? No. The new figures would be published alongside the old ones, not as replacements. And the concepts these figures refer to are relevant: they reflect how well native-born Americans are doing. If people care about the welfare of native-born Americans, surely these numbers matter. Citizenists want to maximize the well-being of native-born Americans, and if they used numbers for all people living in America, they would come to policy conclusions that are not actually optimal for native-born Americans. Clearly that’s a failure for them.

I think natives probably would benefit on net from liberalized immigration, so I think publishing these statistics would politically help supporters of liberalized immigration. But either way, it would help better depict what’s happening to the welfare of natives.

I was thinking earlier today about the effect of immigration on interest rates. In particular, I thought of an unusual argument for immigration restrictions when short-run interest rates are at the zero lower bound.

Some New Keynesian economists have suggested that destroying productive capacity can raise current output in said circumstances. (For academic journal articles asserting this, see the beginning of this paper by Johannes Wiedland, also cited below.)

The reasoning is that a negative supply shock can lower expected production, thereby increasing expected inflation. When short-term nominal interest rates are stuck at zero, this has the effect of lowering expected real interest rates. This in turn causes people to spend more money now, raising output and employment.

Intuitive example: You have money in a bank account earning nearly zero interest. A hurricane forms, threatening the supply of various goods. What do you do? Simple: you take money out of the account and buy goods whose prices you expect to go up. The opportunity cost of doing so is minimal, and buying the goods before they go up in price makes you better off.

Paul Krugman’s example of an “alien invasion”: Nobel laureate economist Paul Krugman gave an infamous example of an attack by aliens on Earth, in which governments would scramble to spend money on defense. This example is a bit different from the one I gave, because the spending is done for the purpose of fighting off a potential supply shock, rather than just reacting to one.

However, in the case of the alien invasion, there is an expected possibility of aliens doing damage to the earth, and some diversion of resources towards fighting aliens instead of producing other goods. Both of these raise inflation expectations, lower real interest rate expectations, and increase present-day spending.

What does this have to do with immigration? When the economy is at the zero lower bound, it could make sense (under the model previously described) to further restrict immigration. This reduces expectations of real GDP, thereby increasing inflation expectations and inducing more spending.

Indeed, some people have referred to the existence of an “illegal alien invasion” (Google the term for examples); namely, of people entering the United States unlawfully. (Put aside the question of whether it is accurate to call mostly-peaceful migration an “invasion”.) But, unlike Krugman’s, this “alien invasion” would lower current output! With more immigrants adding to future real GDP, and short-term nominal interest rates stuck at zero, people would expect that goods will be cheaper in the future than they previously thought, and would hoard more money as a response.

A few reasons why I don’t actually endorse this argument for immigration restrictions:

Even accepting the described view on supply shocks, one might not want to trade off future production for present production. Krugman was joking with his suggestion of faking an alien invasion, and it’s unfair to say that people who endorse this model don’t care about the long term at all.

There are empirical issues with the claim that negative supply shocks at the zero lower bound are expansionary. Johannes Wieland of UC Berkeley argues in the previously linked paper “Are Negative Supply Shocks Expansionary at the Zero Lower Bound?” that “financial frictions” prevent this effect from working. He claims that negative supply shocks reduce the value of banks’ balance sheets, thereby constraining their lending and preventing the positive effect on aggregate demand from taking place. Using a general equilibrium model with these “financial frictions” built in, he finds that negative supply shocks at the zero lower bound do hurt short-run output. More research here may be needed, but his case seems plausible.

There are better ways of dealing with the zero lower bound. I don’t want to get into my views on monetary policy here, but it should suffice to say that most people across the various schools of thought find there to be better ways of getting out of the zero lower bound than deliberately destroying productive capacity.

Immigration could raise returns on capital and investment demand, thereby raising interest rates. Generally speaking, expanding the supply of labor is expected to raise the return on capital by acting as a complementary good. However, I say “could”, because the complementarity between labor and capital is very complex, and there are cases in which immigrants act as substitutes for capital. Dartmouth economist Ethan Lewis has done some work on this subject; see, for instance, “Immigration and Production Technology”.

I can’t say I find the “restrict immigration more at the zero lower bound” argument persuasive, but it is at least interesting, and I think I am the first to suggest it.

David North has a post on his blog at the Center for Immigration Studies titled, “CIS Gets an Offer We Will Refuse from a Bangladeshi Organization”. He explains that a recruiting agency had emailed a foreign recruiting firm, offering to pay his organization for finding employment for a worker sponsored by their agency and arranging for a visa.

He then says that, “In any case, it is highly unattractive, and is an indication of how badly nonimmigrant workers are treated in such cases, and how attractive they can be to exploitative U.S. employers”.

The argument is that, since these states are fiscally dependent upon the federal government, they would be foolish to secede, and, according to Mr. Slattery, engaged in “sanctimonious whining” to even argue for doing so.

The problem with the argument as stated, and a significant problem at that, is that there exist other benefits and costs to secession besides those related to fiscal transfers to and from the central government. Fiscal transfers are only one issue among many, and there is good reason to think that, despite losing fiscal support from the federal government, seceding states could benefit heavily from secession. Some reasons are as follows:

Tax haven status: Free from the United States federal tax system, states could choose to become tax havens for wealthy individuals and corporations. Such could offer substantial benefits to the local populations from revenues on the relatively low taxes imposed on foreigners moving in, increased local investment, and other benefits of immigration (see the item on “immigration policy”).

Regulatory policy: Various businesses might wish to incorporate in the United States due to familiarity with its legal system, language, and business culture, but wish to avoid onerous regulations. States which seceded and proposed more friendly regulatory systems could benefit substanitally from foreign investment. For some, this invokes the image of smog-spewing factories located just outside the US border, but if the secession were on amicable terms, the seceding state could agree to impose some kind of Pigovian tax on pollution and remit funds to the US government as compensation for cross-border emissions.

Other economic and non-economic benefits of increased autonomy: The freedom to conduct “policy experiments” is quite valuable. States with residents opposed to the War on Drugs could decriminalize or legalize drugs without the fear of federal intervention. Liberal states in the Northeast could secede and impose all kinds of policies that would otherwise stand no chance against Republican opposition in Congress. Residents of seceding states might appreciate their greater individual influence over issues previously handled by a central government.

It is also worth noting that one of the states with a prominent secession movement is Vermont, which pays a fair amount more in federal taxes than it receives in spending. It would be amusing to see the anti-secessionists accuse Vermonters of greed instead of foolishness for wanting to leave!

Certainly, a host of other issues would arise, such as how to handle federal infrastructure and land, how immigration and trade between seceding states and their mother countries would work, and the possibility of mutual defense agreements, among others. But such issues have been resolved in previous secessions, including the one which created the modern United States. To merely bring up the “fiscal transfers” argument as though it ends all debate on the matter does gross injustice to an important issue.